The Lowdown from Investment Quorum

Global Markets to 07 January 2019

Highlights

Global equity markets begin the New Year in a positive mood after the Christmas sell-off.

US and Chinese officials commence trade talks, hopefully with a view to better relationships.

Federal Reserve Bank chairman Jerome Powell soothes the financial markets with a sensitive message, asserting that there is no pre-set path for interest rate rises.

Better-than-expected US non-farm payroll numbers help to calm nerves over a US economy that is perceived as slowing.

As far as commodities are concerned, the price of crude oil sees the biggest weekly rise since 2016.

2018 was an annus horribilis for global equity markets, but we expect 2019 to bring attractive investment opportunities.

Global Market Summary

Following the Christmas sell-off and a disappointing final quarter of 2018, global equity markets rallied nicely in the first week of the New Year. In the aftermath of the worst December for US equities since the 1930s, it was a relief to see investor appetite for equities return – even if this does only turn out to be short-lived. Optimism about the US-China trade talks that begin this week, a soothing message from the Fed and better-than-expected US non-farm payroll numbers are all being seen as good omens.

However, over the coming weeks, the markets will be dominated by the outcome of the US-China trade talks, the fourth quarter corporate earnings season, and those important guidance statements from those leading global companies. Equally important will be sensitive economic data and future monetary policy statements from the world’s leading central banks.

China has clearly suffered the most from the recent trade tariffs – its manufacturing sector has contracted for the first time since May 2017. This triggered an immediate announcement from the People’s Bank of China: a further 100 basis point cut to the required reserve ratio for banks in a bid to shore up its economy.

US President Donald Trump asserted that China’s faltering economy gives the US a stronger hand in the trade talks, expressing his belief that a deal would be struck. This was very positively received by traders and the markets. Wall Street, however, was adversely affected by Apple’s disappointing announcement: the iPhone maker is blaming a slowing Chinese economy for its shortfall, with other companies which do business in China finding themselves similarly dragged down.

Apple’s current stock price is now actually starting to look attractive – its share price is now down by 40% from its October high and its market capitalisation has fallen to a two-year low. Furthermore, with a P/E ratio of 12x, it’s significantly cheaper than Facebook and Microsoft (18x and 22x, respectively).

What has become very clear over the past 12 months is that in a trade war nobody really wins: we now operate in a truly global economy in which most companies, economies and then ultimately individuals are affected. Any agreement between the world’s two largest superpowers will, therefore, be in the best interests of everyone concerned.

Another issue of contention over recent months has been the mixed messages emerging from the Federal Reserve Bank regarding the timing of interest rate hikes and the required amount needed to normalise monetary policy in the United States. Earlier last year, statements from Fed chair Jerome Powell spooked both traders and the markets with their more hawkish tone. This led to a spike in US Treasury yields, a period of yield curve inversions and a flash crash on the global equity markets.

However, his message last week suggests that he may be backtracking: while the US economic momentum, he says, is solid, the central bank is sensitive to the messages coming from the markets and would be patient on monetary policy in 2019. He went on to say that there was no predetermined policy path for interest rate rises and that the Fed would not hesitate to change its balance sheet policy if needed.

The statement was interpreted positively by the markets and seen as more dovish than previous announcements. Furthermore, concerns over a recent softening of the US economy seemed to be put to one side as the latest US labour market data revealed stronger job creation than was perhaps expected and an acceleration in wage growth. The US-China trade talks, the Fed statement and the payroll numbers have all created a positive backdrop for risk assets. This, in turn, has led to a significant rally on Wall Street and a spike in the stock prices of recently out-of-favour technology stocks, thus boosting the broader market.

Alongside last week’s rise on Wall Street, safe assets such as US Treasuries have been sold off and the price of crude oil has seen its biggest weekly rise since 2016. Investors are evidently feeling more optimistic – although this may only be a short-lived mood change – with “risk assets” being the theme of the week.

Nevertheless, one swallow does not a summer make. We have yet to see whether there is any breath to this rally, and whether it can be further supported over the coming weeks. Last year was tough for global investors, and a veritable annus horribilis for global equity markets, leaving cash as the only major asset class to provide a positive return.

Last year’s destructive correction in global equity markets has meant that global forward price-to-earnings ratios and valuations now look much cheaper than they did twelve months ago, and below their thirty-year averages. Therefore, although global growth should slow this year, monetary policy should tighten and political trade tensions should remain for at least a while, we nonetheless expect to find some interesting and attractive investment opportunities in 2019.

Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.